Archive for February, 2010

Reinsurance Award Vacated for Evident Partiality of Two Arbitrators

Thursday, February 25th, 2010

A judge in the U.S. District Court in Manhattan has vacated a reinsurance arbitration award on grounds of evident partiality of the presiding arbitrator and one party-appointed co-arbitrator. The award was signed by these two arbitrators, with the third arbitrator registering dissent. During the course of the proceedings, the two arbitrators who ultimately signed the award had been appointed to sit together on a second case. Their disclosures about the new appointments failed to mention that parties in the two cases were affiliates, that there was a common witness whose testimony had already been heard and evaluated in the second case, and that an issue in common to both cases was addressed by that testimony.
The Court applied the legal standard stated by the U.S. Second Circuit Court of Appeals in Applied Industrial Materials Corp. v. Olvalar Makine Ticaret Ve Sanalyli A.S., 492 F.3d 132 (2d Cir. 2007): “An arbitrator who knows of a material relationship with a party and fails to disclose it meets [the] evident partiality standard: A reasonable person would have to conclude that an arbitrator who failed to disclose under such circumstances was partial to one side.” Here, the Court rejected the argument that a different standard should apply to relationships with co-arbitrators and witnesses, as opposed to parties, stating that it is the materiality of the relationship that is dispositive, not the arbitration participant with whom the relationship exists. (Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., 2010 U.S. Dist. LEXIS 15952 (S.D.N.Y. Feb. 23, 2010)).

Principle of Separability of the Arbitration Clause Reaffirmed

Thursday, February 25th, 2010

Adhering to well-settled principles concerning the separability of the arbitration clause, the U.S. Sixth Circuit Court of Appeals reversed an order that had denied a motion to compel arbitration, and held that the lower court improperly relied upon allegations of fraud in the inducement of the entire contract and that there were no sufficient allegations of fraud pertaining specifically to the agreement to arbitrate. The Court also rejected Appellee’s attempt to characterize the dispute as one involving the existence, rather than the validity, of the entire contract, and held that where the position taken is that the signatory to the contract breached fiduciary duties by entering into it, the challenge was to the validity of the contract and thus it was for the arbitrator to resolve in the first instance. (Moran v. Svete, 2010 U.S. App. LEXIS 3812 (6th Cir. Feb. 24, 2010).

Reconsideration by Arbitrators: A Canadian Perspective

Thursday, February 25th, 2010

Readers of these Commentaries will have been exposed recently to Second Circuit decision in January 2010 concerning the powers of an international arbitrator to reconsider and change the outcome under the rubric of correcting “clerical” and “typographical” errors. (T. Co. Metals LLC v. Dempsey Pipe & Supply, Inc., 2010 U.S. App. LEXIS 893 (2d Cir. Jan. 14, 2010)).

On the heels of that decision — which sustained the powers of the arbitrator to change the award, as a consequence of the deference due to the arbitrator’s interpretation of the ICDR’s “clerical error” rule — comes a decision of the British Columbia Court of Appeal holding that an arbitrator exceeded his powers by issuing a corrected award in which the arbitrator (i) admitted that there was error in his reliance upon certain evidence, and (ii) provided an alternative rationale for reaching the same result as in the original award. (Westnav Container Services Ltd. v. Freeport Properties Ltd., 2010 BCCA 33 (Jan. 25, 2010)).

Here the arbitration was conducted pursuant to British Columbia’s Commercial Arbitration Act (“BC Act”), not (as in Dempsey) under institutional arbitration rules adopted by the parties in their agreement. The BC Act provided, much like the ICDR Rule 30.1 implicated in the Dempsey case, that an arbitrator was empowered to correct “a clerical or typographical error”, an “arithmetical error” or “an accidental error, slip, omission or other similar mistake.”

In Westnav, the arbitrator was asked to determine the fair market rent for a certain property. In the original award, he relied upon the rent for a certain property as being comparable to the property to be valued. He erred in interpreting the evidence, using a rental value for that comparable property that he attributed solely to the buildings on the parcel, when in fact that figure represented the rental value of the building and underlying land. When the error was called to the arbitrator’s attention, he issued a corrected award that excluded any reliance on that property as a comparable, and furnished different reasons for reaching the same conclusion as to value as had been stated in the original award.

This, the Court of Appeal held, exceeded the arbitrator’s powers, as viewed through the lens of a legal standard (in Canadian and U.K. law) that permits corrections to express accurately the arbitrator’s “first thoughts” but not to have “second thoughts.”

The Dempsey and Westnav cases have much in common. In each case, after issuance of the original award, the aggrieved party asserted that the arbitrator had misinterpreted evidence, and in consequence had misplaced reliance on that evidence. In each case, the arbitrator agreed. In Dempsey, the arbitrator’s response was to disclaim reliance on that evidence, reassess the remaining evidence, and change the outcome. In Westnav, the response was to disclaim reliance on that evidence, and to furnish different reasons for the original outcome.

Each case presents a clear instance of the arbitrator having “second thoughts.” So what explains the divergent results — the arbitrator in Dempsey having had power to change the outcome sustained, while the Westnav arbitrator was denied power to change the rationale of the original result?

The most evident difference is the role of the State — and hence the State’s courts — in controlling the arbitration. In Dempsey, the correction rule was an aspect of the private system of rules, created by the ICDR and adopted by the parties with the understanding the arbitrator would interpret those rules. In Westnav, the arbitration was pursuant to the BC Act, and the correction rule appeared in the BC Act, and it is implicit in the Westnav Court’s decision that in interpreting the BC Act, the Court owes no particular deference to the arbitrator.

Is this a sufficient justification for the different outcomes? The ICDR’s rule on correction of awards, like the correction provision of the BC Act, lies curiously at the boundaries of arbitral power and public policy concerning the finality of arbitral decisions. But the ICDR rule, having no explicit connection to any national law regulating arbitration — despite its provenance in national laws (including the UNCITRAL Model Law) governing arbitration — is, under United States law, to be primarily construed by the arbitrator unless there is egregious abuse. So long as the United States remains a jurisdiction that elects not to adopt the UNCITRAL Model Law or otherwise to establish uniform standards for the conduct of international arbitrations, there will be significant potential for arbitrators to interpret and apply institutional rules of arbitration in ways that would not be sustained under parallel provisions of national arbitration laws.

Enforcement of Convention Award Against Sovereign Not a Convention Member State

Wednesday, February 24th, 2010

A recent judgment of the Hong Kong Court of Appeal addresses in painstaking detail the sovereign immunity issues implicated when enforcement and execution are sought of a private arbitration award which, while made in the territory of a Member State of the New York Convention, runs against a sovereign state that is not itself a Member State of the Convention. (FG Hemisphere Assocs. v. Democratic Republic of the Congo, CACV 373/2008 & CACV 43/2009, unpublished judgment, copy available from this writer).

Two members of the three-judge panel agreed, and held, that
(i) at the time of transfer of Hong Kong sovereignty to the PRC, the restrictive theory of sovereign immunity (i.e. no immunity where the State engages in commercial activity) was a principle of customary international law and as such had been incorporated into the common law of Hong Kong;
(ii) the PRC having not abrogated this common law principle by statute applicable to Hong Kong after the transfer of sovereignty, restrictive immunity remains the law in Hong Kong, despite the fact that the PRC applies absolute immunity, by statute, on the Mainland and asserts in international affairs its adherence to the principle of absolute immunity;
(iii) the transactions that gave rise to the ICC award against the Democratic Republic of the Congo (“DRC”) were commercial, and so the DRC had no immunity from the jurisdiction of the Hong Kong courts to enforce the award; and
(iv) the first instance court would be permitted to find, on remand, that all or part of the DRC assets located in Hong Kong, and against which execution was sought, were dedicated to commercial rather than sovereign purposes and thus had no immunity from execution.

The result of the judgment was to reinstate asset-freeze orders of the first instance court, which had restrained PRC and Hong Kong companies that were indebted to the DRC from transferring the funds to the DRC pending final determination of whether those funds should be applied in satisfaction of the ICC award against DRC. A first-level appeals court had vacated those orders.

The separate opinions of the three judges reflect painstaking attention to the evolution of restrictive immunity in 20th century jurisprudence, and in national laws. The dissenting judge finds that restrictive immunity does not deserve recognition as customary international law, having failed to achieve sufficiently widespread recognition and application as a matter of perceived legal obligation. For the dissenting judge, it appears that the world is divided between the developed and capitalist countries countries that seek to treat sovereign states as commercial parties, and less developed and socialist states, which tend to be more protective of sovereign prerogatives. One is reminded that whether an international legal principle deserves recognition as custom can depend heavily on what sources are consulted — and here the reliance of the majority on Western jurisprudence and practice cannot be denied.

The Court of Arbitration for Sport: An Olympic Viewer’s Guide

Thursday, February 18th, 2010

Five-time Olympic champion German speed skater Claudia Pechstein today awaits a decision from an arbitral tribunal of the ad hoc Division of the Court of Arbitration for Sport (“CAS”), hoping for a reprieve from a two-year suspension imposed a year ago when blood tests indicated use of performance enhancing drugs.

Respondents in the case are the German National Olympic Committee and the International Olympic Committee. The International Skating Union also appears as an interested party.

Ms. Pechstein previously lost an appeal of the suspension before another CAS arbitral tribunal in November 2009, and last month the Federal Supreme Court of Switzerland refused to grant temporary relief to permit Ms. Pechstein to compete in Vancouver.

According to news reports, the CAS award in November was based on blood tests that showed high levels of a particular chemical in red blood cells, a condition consistent with use of performance enhancers but also explainable on other grounds. Ms. Pechstein is said to have maintained that the test results are attributable to a congenital medical condition.

Respondents’ objection to the jurisdiction of the tribunal in Vancouver has been briefed and a decision is anticipated today or Friday. Ms. Pechstein hopes to compete in the 5,000 meter event on February 24.

The CAS, whose seat is in Lausanne, has operated ad hoc divisions at each of the Olympic Games since Atlanta in 1996. A roster of eight arbitrators is on call to convene in three-member tribunals appointed by the President of the ad hoc Division, to sit in emergency sessions, and to decide cases on a very expedited basis consistent with the requirements of the case in relation to forthcoming competitions.

The CAS Arbitration Rules for the Olympic Games may be downloaded from the CAS website ( The Rules require an athlete to exhaust remedies before a sports federation or national Olympic committee having juroisdiction of the matter before filing a CAS Olympics case. While the hearing venues will be in Vancouver or at nearby Olympic venues, the seat of these arbitrations is Lausanne and Chapter 12 of the Swiss Act on Private International Law applies.

The Rules provide for an immediate evidentiary hearing, but further state: “If it considers itself to be sufficiently well informed, the Panel may decide not to hold a hearing and to render an award immediately.” The applicable law, per the Rules, shall be “the Olympic Charter, the applicable regulations, gemeral principles of law and the rules of law, the application of which [the tribunal] deems appropriate.” If no majority can be formed, the presiding arbitrator may decide alone.

Preclusive Effect of Prior Award is Arbitrable Issue

Thursday, February 11th, 2010

A federal district judge in Indiana last week commendably resisted the temptation to impose a permanent stay of an ICDR arbitration that arguably was brought to reopen and relitigate issues decided in an earlier award that had been confirmed by the District Court and uphed by the US Seventh Circuit Court of Appeals. Citing a decision written by Justice Sonia Sotomayor when she was a federal district judge in Manhattan (North River Ins. Co. v. Allstate Ins. Co., 866 F. Supp. 123 (S.D.N.Y. 1994)), the Court held that the preclusive effect of the prior arbitration award is itself an arbitrable issue. Accordingly a temporary stay of this new arbitration, in a long -running battle between a US multinational and one of its former Moscow office executives, was dissolved and the ICDR arbitration will proceed. Masco Corp. v. Prostyakov, 2010 U.S. Dist. LEXIS 10372 (S.D. Ind. Feb. 5, 2010).